Income tax rates matter to employment lawyers, but to an employment lawyer, nothing matters so much on a day-to-day basis as the £30,000 tax exemption for termination payments. Termination payments are taxable, but there is an exemption for the first £30,000 of any payment.

When I started out as an employment lawyer, £12,000 was the highest that any compensatory award for unfair dismissal could be. The limit is now £72,800, and compensation for discrimination and some special kinds of unfair dismissal has no upper limit. Throughout this time, the tax exemption for termination payments has been £30,000. In fact, it has been £30,000 since 1989.

According to the Bank of England’s handy inflation calculator, £30,000 in 1989 is the equivalent of just over £60,000 in today’s money. However, despite an attempt by the TUC a few years ago to get the level of the exemption raised, there has been very little political enthusiasm from either the right or the left to raise the level of the exemption. Any rise would be most likely to benefit the those who were already high-earners, and could give rise to accusations of allowing tax-free “golden handshakes” to “fat cats”.

All of this means that the question of taxation is becoming a more frequent issue in employment disputes and tribunal cases, with complex “grossing-up” calculations being required to work out the amount of tax due on any payment. This can have a significant effect. To take an extreme example, in the Michalak case, just over £2m of the £4.5m awarded was accounted for by tax.

While I am on the inflation calculator, the limit of the tribunal’s juridiction in breach of contract cases has been stuck at £25,000 since 1994, which would be about £40,000 now, and the original cap on a week’s pay for redundancy purposes (£40 in 1965) would be £635 in today’s money (it is actually £430).

(Note: the exact workings of the tax-free exemption and how it operates are complicated – some payments count towards it and some don’t. You should take specialist advice if you want to know exactly how it might work in any particular situation.)

Share this:

One comment

‘Any rise would be most likely to benefit the those who were already high-earners, and could give rise to accusations of allowing tax-free “golden handshakes” to “fat cats”.’

Maybe. An alternative view is that raising the tax threshold would actually benefit businesses, not fat cats. As an employer you are only compensating the departing employees for their net loss, so you have to “gross up” the non-tax-free element – in effect, paying the tax to the employee so they can pay it to HMRC. Raising the tax free amount would mean less to gross up and therefore terminations would cost business less. Isn’t that err… kind of central to this government’s philosophy?